6 Rules to Follow When Investing in Property

check-list-redWhether you are a first time investor or manage several investment properties, the following 6 rules will provide a solid framework for ensuring your investments continue to generate returns over their lifetimes.


Rule 1: Follow on the advice of experienced professionals

Advice should be sought not only from people with theoretical knowledge, such as financial advisers and accountants, but also from those who have practical experience and success in property investments. The best advice for property investment will come from those individuals who have had years of experience searching and managing their property portfolio successfully.


Balancing-the-Scales-Between-Points-and-Interest-RateRule 2: Positive geared properties

Having a positively geared investment property is vital to obtain a healthy return on your investment. By obtaining a property with high rental yields, your property will generate higher levels of cashflow to cover the up-keep costs of the property.

Rental yield

= rent per year / property price

= $15,600 per week year / $450,000

= 3.5%

A rental yield between 4.5 – 6.0 % is considered high and will generally cover the outgoing costs of the properties. Any subsequent additional costs to support the investment will be minimal on your behalf.

Rule 3: Location and position

The key to selecting a property that will generate good returns on your investment is to choose a good location and position.

When you research for your next investment property, it is vital that you stay objective and select areas with good opportunities for growth. Buying property in an area solely because you are familiar with the neighbourhood is a bad mistake.


Locality Features to Look Out For:

Apartments:

– Proximity to business districts

location-map-house-suburb-area-find-300x225Townhouses:

– Areas in high demand

– Close to shopping centres

– Access to public transport

– Nearby infrastructure

House & Land:

– Located close to public transport

– Access to major arterials

– Close proximity to schools & universities

– Nearby major shopping centres, medical facilities, doctors, hospitals, recreational parks, sporting facilities & community centers

Rule 4: Keep property tenanted

Cashflow from a tenanted property contributes significantly to whether an investment property becomes positive or negative gearing. As previously mentioned, you need to select a property that will return high rental yields, but also in high demand to ensure leaving tenants are quickly replaced by new tenants.

The vacancy rates of a suburb is a good indicator of the rental demand, with low vacancy rates suggesting there is a surplus of tenants and not enough properties.

When considering an investment property, select properties that are
situated in close proximity to the type of amenities and services that tenants will favour, such as, public transportation, easy access to freeways, shopping centres, schools, hospitals, medical centers,
etc.

Rules 5: Maximise tax benefits

tax-benefit

One of the major attractions of investment properties is the ability to depreciate the cost of the building and certain fixtures and fittings. The effect of this is a substantiate reduction on your personal income tax.

There are many more deductions on investment properties that can contribute to lowering your personal income tax, even to the point of lowering your income tax bracket.

Rules 6: Finance strategy

An interest only investment loan is generally the best loan structure for a property investor who can foresee the property gaining in value over time. An increase in equity will insure a profit is made on the eventual resale of the property.

In this type of strategy, the investor has monthly repayments restricted to the paying off of the interest component of the loan only. This means that there is a significant saving in loan  repayments and an increase in cash flow. Interest only loans also provide the following benefits:

1. The real return that you are getting for the property is easier to work out by clearly separating the interest from the principal.

2. There are big financial benefits from tax deductions you can claim on interest only payments as there are no tax deductions allowable off any payments made off the principal.

3. Your monthly repayments will be much lower than they would have been if you had been making both interest and principal reducing repayments.